Government eases funding rules for startups

A recent notification issued by the ministry of corporate affairs (MCA) makes it easier for startups to access funds via the convertible note route. This notification is part of the all-round initiatives planned by the government to strengthen the startup ecosystem in India.TNN | July 04, 2016, 08:23 IST

If a tax holiday is to be availed, the entity is required to be set up between April 1, 2016 and March 31, 2019 and an approval of an inter-ministerial board set up by DIPP is required. The tax holiday is available for a period of three years in a block of initial five years.MUMBAI: A recent notification issued by the ministry of corporate affairs (MCA) makes it easier for startups to access funds via the convertible note route.

This notification is part of the all-round initiatives planned by the government to strengthen the startup ecosystem in India.

Funds received by a startup amounting to Rs 25 lakh or more by way of a convertible note, in a single tranche from a person, will not be treated as a `deposit'. The convertible note is to be either converted into equity or repaid within a period of five years.The Companies (Acceptance of Deposits) Rules have been accordingly amended via a notification dated June 29.

Owing to this relaxation, the stringent rules relating to informing the registrar of companies (RoC) or creating a deposit repayment reserve in the books of accounts will not apply to the startup receiving funding via convertible notes. However, it should be noted that the relaxation is available only to startups that meet the governmentprescribed norms (as defined by the department of industrial policy and promotion, or DIPP).

This notification is the second such initiative to ease funding challenges for startups. TOIhad in its edition da ted June 20 reported that eligible startups will be exempt from angel tax. They will not have to pay any tax on the differential between funding received from non-registered funds or high net worth individuals and the fair market value of their entity.

Startups are defined by a DIPP notification dated February 17, 2016, to mean “an entity, incorporated or registered in India not prior to five years, with annual turnover not exceeding Rs 25 crore in any preceding financial ye ar“. Second, such an entity is required to be engaged in “development, deployment or commercialization of new products, processes or services driven by technology or intellectual property“.

If a tax holiday is to be availed, the entity is required to be set up between April 1, 2016 and March 31, 2019 and an approval of an inter-ministerial board set up by DIPP is required. The tax holiday is available for a period of three years in a block of initial five years.

A status report issued by `Startup India', the government initiative under the auspices of the DIPP, provides an indication of the interest in the programme. Till June end, 571 applications had been received from entrepreneurs. While 106 of these applications were complete, all of them will not get a tax holiday (even as other incentives could be available) as a majority of these companies were incorporated prior to April 1. Only 12 entities qualify for the tax holiday, subject to clearance by the inter-ministerial board. Five of these entities have yet to provide the required documents. DIPP is reaching out to top companies requesting them to set up new incubators or scale up existing incubators in collaboration with educational institutions. An online learning module will soon be available for entrepreneurs.